Last week my friend Nathan and I visited a toy shop on Alberta Ave in Northeast Portland on our way to breakfast. "Come in here, you've got to check out these really cool toys", I told him. He agreed that they had some pretty cool stuff, but we were both shocked by the cost of the toys.
We discussed it further over breakfast. Since I personally believe in buying local, buying sustainable, and buying natural, the prices were not as much of a shock to me, so I found myself trying to make the case for why we were justified in paying those prices. But the real question we kept returning to was why the prices were so high compared to a mass market toy.
We identified these probable factors:
- The toys are higher quality than mass market toys, so all other things being equal, they would cost more.
- The toys are produced in smaller quantities compared to mass market toys, so the mass market toys gain from manufacturing efficiency enjoyed at higher volume.
- The toys are distributed through small, local retailers rather than mass market retailers, so the retailer market is probably higher.
It seemed that these factors combine in a way that magnify each other. If they cost 20% more because of quality, 50% more because of being produced in low volume, and 50% more because they are distributed by a small, local retailer, the combined effects is 1.2 * 1.5 * 1.5 = 2.7 times the cost of a mass market toys.
This is a state of affairs that I've lamented for some time. As major manufacturers focus on driving cost out of products, they are willing to accept varying levels of decrease product quality. In some cases they intentionally go for a low price, low quality product to compete on the low end. In other cases, they are merely looking for incremental cost reductions, and accept minor quality decreases.
But what happens when all major manufacturers focus on cost reducing, as they have in recent years? The result is that products which were available from a mass market manufacturer at a given quality level and given price are no longer available. You can find a less expensive product at lower quality, or a much more expensive product at the same quality level. In effect, quality costs more.
Let's walk through an example.
Imagine a mass market manufacturer builds a toy truck that costs $15. They cost reduce the product, and now sell a lower quality toy truck that costs $10. Now imagine as a shopper that I'd like to buy a toy truck of good quality. I look for the $15 truck at a mass market retailer, and it doesn't exist. There is a $10 truck, but it's lower quality than I would like. There is no $15 truck available for me to buy at that retailer.
If I'm really motivated, I'd leave that retailer and go seek a local retailer that is reputed to carry higher quality toys. The local retailer does carry a truck at the quality level I'm looking for. And it might have sold for $15 if it was manufactured by a mass market manufacturer and sold by a mass market retailer. But it's not. It's made by a boutique manufacturer, and sold by a local retailer. Now the $15 truck costs about $33 ($15 * 1.5 * 1.5).
Basically, the desired level of quality is no longer available at the price it was previously available at, and it now costs more to get that same level of quality. For most shoppers, they're going to walk out the door with the cheaper $10 truck, and just live with the lower quality level. For a few shoppers, they're going to get stuck paying more.
The net effect is that the relentless drive towards mass market cost reduction is raising the price of quality to the end purchaser.
